Case Study Presentation

Content
Value of Yuan Problem Analysis The Yuan Game Revaluation of Yuan Impact of Revaluation SWOT analysis Effects on U.S. market Benefits of a Strong Yuan Yuan replacing USD? Conclusion

The Yuan
The Renminbi (RMB, , CNY) is the official currency of China (People's Republic of China). It is issued by the People's Bank of China, the monetary authority of China. Its name means People's Currency". The primary unit of renminbi is the Yuan (). 1 Yuan is subdivided into 10 jiao, which in turn is subdivided into 10 fen. Renminbi banknotes are available in denominations from 1 jiao to 100 yuan and coins have denominations from 1 fen to 1 yuan. 1 USD = 6.2345 CNY (Current)

Value of Yuan
In 1994, China cut the Yuans value by 30 % and adopted a managed float system. In 1996 Chinese currency became convertible but strict controls made it difficult to covert the Yuan to other currencies and visa versa. The value of the Yuan was fixed at a rate of 8.3 Yuan to the dollar between 1994 and 2005. In 1997, during the Asian financial crisis, the Yuan was pegged to the U.S. dollar.

Problem Analysis
Undervalued Yuan Heavy Export from China causing American trade deficit of about $162 billion in 2004 alone. Global Housing Boom Oil Price Shock 10% drop in the average prices of shoes & clothing in United States Low American bonds yield

Undervalued Yuan
Most analysts estimate that Yuan is still undervalued by 25-30%, which gives China a huge advantage in international trade. The U. S. considered charging China with currency manipulation. The U.S. manufacturing groups blame the Chinese currency for a loss of more than 1 million jobs. Non-Chinese argue that a stronger Yuan will not only help foreign countries it could benefit China by reducing its reliance on exports and generate strong demand at home.

The Yuan Game

To keep the Yuan from rising against the dollar the central bank buys most of the foreign currency that flows into the country from exports & foreign investments and exchanges them to Yuan. To prevent these funds from entering the financial system and fueling inflation, the central bank issues treasury bills to financial institutions. Many outsiders argue the low Yuan gives Chinese enterprises an unfair advantage and makes it hard for other countries to match the low prices of Chinese imports.

Revaluation of Yuan
On 21st July 2005, China revalued Yuan upward by 2.1%, abandoning the peg against the dollar, and allowing Yuan to float against other currencies such as the yen, dollar and euro and allowing it to float within 0.3% of the dollar a day. The revaluation of the Yuan changed the value of the yuan from 8.277 Yuan to the dollar to 8.110 Yuan to the dollar. The United States had been calling for a revaluation of 10 percent and been threatening to slap a 27.5 percent tax on Chinese imports.

Why Revaluation?
Tremendous US political pressure - Tariff on all Chinese imports Huge trade surplus ,control on capital outflows and high domestic savings had created excessive liquidity Increased liquidity was threatening to raise domestic prices

Impact of Revaluation
Yuan undervaluation created imbalances in the world saving investment balance. Control Over Deficit Increased Export Rise in Interest Rate Short-term Inflation Effect of revaluation had a very little effect on U.S.

After the Revaluation

The Yuan appreciated steadily against the dollar. In the first year after the re-evaluation it had not risen more than 0.15 percent on one day, half the maximum of 0.3 percent, and gained 0.9 after one year. The value of the Yuan broke the 8 Yuan to a dollar mark in May 2006 and rose to 7.81 per dollar in January 2007, rising in value by more than 6% since July 2005. The Yuan broke the 7.5 to the dollar mark in October 2007. The yuan rose around 9% in 2007 and 4.4% in the first three months of 2008.

SWOT Analysis

STRENGTH

WEAKNESS

1) Cheaper imports 1) Impact on FDI 2) Control of inflation 2) Comparatively higher cost 3) Shell out less Yuan for oil imports of export

OPPORTUNITY

THREATS

1) Reduced Foreign Debt Obligation 1) Increase in NPAs of Banks 2) Focus on domestic economy 2) Flooding of cheaper goods 3) Overseas investment & expansion 3) Capital outflow

Pros and Cons for India

Pros
Improved Exports Increased investment in India Flexible Yuan will provide some comfort to Central Banks of countries that compete with Chinese exports also acting as a dampener to inflation.

Cons
Absence of Cheap Chinese Goods Major setback to the Software companies having revenues in dollars

Pros and Cons for U.S.

Pros
Control Over Deficit. Political Pressure. Increased Export. Domestic production Increased domestic employment Higher profits for U.S MNCs- benefit of conversion rates

Cons
Short term higher Inflation Rise in Interest Rate Shrinkage in oil revenues Electronics producers such as Dell, Apple etc. who built factories in China to manufacture products for the U.S. market.

Effect on American Market

Increased Borrowing

High price of Assets

Cheap Chinese products

Reduced Inflationary pressure.

Lower interest rates by Central Banks.

US-China Cold War

In June 2007, U.S. Senate unveiled a bill intended to force the Chinese to raise the value of the yuan. The bill was announced at a time when the U.S. trade deficit with China was at an all time high. China responded to threats with assertion that the value of yuan is not the main reason for United Statess trade deficit and U.S. should ease its export regulations of high-tech items. In June 2010, just before major meetings of the G-20 and G-8, China promised to allow more flexibility in the yuans valuation and removed the yuan from its 23-month peg to the dollar.

US-China Cold War (contd.)

The move was seen by some as the biggest shift in currency policy in two years. The value of the yuan reached 6.79 to the dollar, the strongest it had been since the peg on the dollar was dropped in 2005. In September 2010, U.S. Treasury secretary Timothy Geithner hardened his position on the yuan value issue and said it was time for China to move faster to increase the value of the yen. A few days before U.S. President Obama made a personal plea to Chinese Premier Wen Jiabao for China to change to yuan policy.

US-China Cold War (contd.)

In response China has called the weak dollar and low United States interest rate a threat to the global economy. It also said China should be given some credit for holding the currency steady against the dollar during the 2008-2009 global financial crisis when the value of the yuan rose against every currency except the Japanese yen . China said they should be praised for generating growth during the crisis making it less severe than it otherwise might have been.

Raising the Value of Yuan

US Legislator has accused that China has deliberately kept its currency undervalued to promote export. Some economists advocate a free-floating Yuan and argue a major revaluation upward of the Chinese currency wouldn't signal a crisis for exporters. They believe any loss to profit margins would be more than offset by cheaper costs for labor and raw materials. If yuan gained significantly against the US dollar, China might buy the less T-bills to finance the US deficit.

Benefits of a Strong Yuan

Liberalizing the yuan and letting it appreciate will help with two of Beijing's most pressing priorities - controlling inflation and giving its vast middle class more buying power. Having a strong, easy-to-exchange yuan and a market that investors can easily buy in and out of has many advantages: 1.) Investors, banks, governments will be more willing to hold Chinese currency and bonds. 2.) China can practically print money to buy foreign assets, & investors essentially extend to you an interest-free loan.

Benefits of a Strong Yuan (Con.)

3.) China can issue debt to large finance investments. 4.) Chinese financial markets will end up deeper which will make Chinese banks more competitive.

5.) Conducting overseas trade in yuan avoids risks that come with fluctuating exchange rates, giving Chinese companies greater bargaining power.

Yuan Replacing the Dollar?

With the dollar depreciating and the euro imploding, China is seizing the opportunity to encourage other countries to use its currency as a medium for trading and investments, as well as a store of value. It's a big leap forward since Yuan is tightly controlled and isn't freely convertible into other currencies. In recent years, China has stepped up an ambitious plan to increase the circulation of Yuan outside the mainland and persuade trading partners to use it to invoice or settle transactions.

Conclusion
Stronger Yuan is good for the rest of the world Reduction in oil prices, commodity prices In other countries, domestic businesses would flourish Foreign economies would prosper Global trade deficits would go down Sustained growth of all nations is good for the world economy as such as opposed to that of one country

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